Regulatory capture is a form of political corruption that occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or special concerns of interest groups that dominate the industry or sector it is charged with regulating. Regulatory capture is a form of government failure; it creates an opening for firms to behave in ways injurious to the public (e.g., producing negative externalities). The agencies are called "captured agencies".

For public choice theorists, regulatory capture occurs because groups or individuals with a high-stakes interest in the outcome of policy or regulatory decisions can be expected to focus their resources and energies in attempting to gain the policy outcomes they prefer, while members of the public, each with only a tiny individual stake in the outcome, will ignore it altogether.[1] Regulatory capture refers to the actions by interest groups when this imbalance of focused resources devoted to a particular policy outcome is successful at "capturing" influence with the staff or commission members of the regulatory agency, so that the preferred policy outcomes of the special interest groups are implemented.

Regulatory capture theory is a core focus of the branch of public choice referred to as the economics of regulation; economists in this specialty are critical of conceptualizations of governmental regulatory intervention as being motivated to protect public good. Often cited articles include Bernstein (1955), Huntington (1952), Laffont & Tirole (1991), and Levine & Forrence (1990). The theory of regulatory capture is associated with Nobel laureate economist George Stigler, one of its main developers.[2]

Likelihood of regulatory capture is a risk to which an agency is exposed by its very nature.[3] This suggests that a regulatory agency should be protected from outside influence as much as possible. Alternatively, it may be better to not create a given agency at all lest the agency become victim, in which case it may serve its regulated subjects rather than those whom the agency was designed to protect. A captured regulatory agency is often worse than no regulation, because it wields the authority of government. However, increased transparency of the agency may mitigate the effects of capture. Recent evidence suggests that (even in mature democracies with high levels of transparency and media freedom) more extensive and complex regulatory environments are associated with higher levels of corruption (including regulatory capture).[4]

http://en.wikipedia.org/wiki/Regulatory_capture